BIS Warns, “Government Debt Expansion Could Lead to Worsening Inflation and Currency Depreciation”

Bank of International Settlements Warns, “Government Debt Expansion Could Lead to Worsening Inflation and Currency Depreciation”

The Bank of International Settlements has publicly warned, “Government Debt Expansion Could Lead to Worsening Inflation and Currency Depreciation,” and the Bank of Korea is expected to cut interest rates on the 29th.

On the 27th, Bank of International Settlements (BIS) President Agustin Carstens warned, “The era of ultra-low interest rates is over,” and “Markets are already realizing that some paths are unsustainable. Financial markets could suddenly become unstable as they face major imbalances.”

In a speech at a conference hosted by the Bank of Japan on the same day, President Carstens said, “Governments around the world should restrain the ‘unstoppable’ increase in public debt as some countries’ fiscal paths become unsustainable due to interest rate hikes,” and regarding monetary policy, he said, “Central banks should not expect to stabilize inflation ‘within a very short and narrow range.’”

The governor warned of “currency instability,” saying, “This is especially important because, as recent events have shown, inflation will depend in part on factors that are not under the control of central banks.” “That is why fiscal soundness must begin now in many economies. It is not enough to just dilly-dally.”

The governor went on to point out that “defaults on public debt could destabilize the global financial system and threaten monetary stability because central banks could be forced to finance government debt, which could lead to fiscal over monetary policy,” and pointed to “expanding fiscal deficits causing currency instability.”

Reuters reported that “the warning comes amid a recent surge in bond yields in the U.S., Japan and Europe, partly due to market expectations that these governments will increase spending as a result of increased debt.”

Reuters reported in a separate Korean article that “all 36 economists who participated in a poll conducted from May 19 to 25 expected the Bank of Korea to cut the base rate,” and “separately from monetary easing, economists who participated in the poll also pointed to the possibility of fiscal support after the presidential election in early June in addition to the 13.8 trillion won (10.1 billion dollars) government supplementary budget approved this month,” and directly expressed concerns about the “widening government deficit” in his speech, saying, “Many countries will face pressure for more public spending due to aging populations, climate change, and increased defense spending.” “Fiscal authorities must provide a transparent and reliable path to safeguard fiscal solvency, ideally supported by a stronger fiscal framework. Then they must deliver on their promises. Central banks cannot be the only game in town.” The BIS promotes international monetary and fiscal cooperation among central banks and serves as a bank for central banks.

The Global Central Bank Governors' Meeting, held in Tokyo from the 27th, is a two-day annual conference hosted by the Bank of Japan (BOJ) and its think tank, attended by prominent scholars from the United States, Europe, and Asia, as well as New York Fed President John Williams, and officials from the European Central Bank, the Bank of Canada, and the Reserve Bank of Australia.

Reuters said of the conference, "Central bankers will focus on two uncomfortable realities: economic growth and sticky inflation," adding, "While concerns about a recession due to tariffs are high this year, the conference's session themes indicate that policymakers are still sensitive to the risk of being trapped by persistent and too high inflation."

One session of the conference will focus on "reserve demand, interest rate control, and quantitative tightening," while another will discuss the International Monetary Fund's (IMF) December paper, "Monetary Policy and Inflation Fears."

The IMF paper warns of the “risks” central banks face when they assume they can sift through cost-push inflation, explaining how a large supply shock like the one caused by the coronavirus pandemic could lead to persistent inflation.

 

By the end of 2024, Korea’s government debt is estimated to exceed KRW 1,175 trillion, excluding public enterprise debt and non-financial institution debt based on BIS standards, with corporate debt estimated at KRW 2,800 trillion and household debt at KRW 2,300 trillion. The fiscal balance for fiscal year 2024 is a deficit of KRW 104.8 trillion. 

The government's budget management balance for this year is -73.9 trillion won, and about 30.9 trillion won more than last year has already been filled with new national bonds.

If additional national bonds increase rapidly after the presidential election and the trade deficit overlap, it will result in twin deficits.

​In a TV speech in support of Lee Jae-myung, Kim Hyun-jong, a foreign affairs advisor, said on the 25th, "Our country's leader must have the know-how to prevent the people from being beaten to death or starving to death. The former is the realm of diplomacy and national defense, and the latter is the realm of technology, industry, and trade." He added, "Comprehensively dealing with this is security, which is something that only Lee Jae-myung can do."
Through this, he belittled the identity of a sovereign nation as a colonial rule relationship of "starving and being beaten to death," and announced his election pledge to "remake the government monopolize the rights of the people."

By popular sovereignty, the Constitution stipulates that <Article 34 ① All citizens have the right to a life worthy of human beings. ② The State has the duty to endeavor to promote social security and social welfare>.

Article 32 of the Korean Constitution stipulates that <① All citizens have the right to work. The State shall endeavor to promote employment of workers and guarantee fair wages through social and economic means, and shall implement a minimum wage system as prescribed by law. ② All citizens have the duty to work. 

The State shall determine the content and conditions of the duty to work by law in accordance with democratic principles. ③ The standards for working conditions shall be determined by law to ensure human dignity, and the system of labor and wage security based on law, which is a national obligation, clearly states that the ‘dignity of the seal’ is given top priority.

The candidate stated that his presidential campaign pledge would be "210 trillion won over five years."

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